How should inventory errors be fixed in the financial reports?

• A. Inventory errors should be fixed by adjusting the sales revenue.
• B. Inventory errors should be fixed by adjusting the accounts payable.
• C. Inventory errors should be fixed by creating a new expense account.
• D. Inventory errors should be fixed by adding a disclosure to the new financial reports, explaining what was done and why.

Answer: (D)

Inventory errors affect both asset values and the reported profitability, so the way to fix them is to be transparent about what happened and how it was corrected. When an inventory misstatement is discovered, you don’t simply tweak revenue, liabilities, or create a new expense account. Instead, you provide a disclosure that explains the nature of the error, what was done to correct it, and the impact on the prior and current financial statements. If the error is material for prior periods, you would also restate those prior-period numbers. The disclosure informs users why the numbers changed and ensures the financial statements remain trustworthy.